Page 96 - DECO402_Macro Economics

Unit-10: Investment Function

Notes

Task Express your ideas in the
relation to ‘Investment’.

Marginal efficiency curve can be shift by the change
of expectation of investor. The hopeful nature of
businessman will shift marginal efficiency of capital
curve to upward relate to required returns by capital
property. That type shifting ? in marginal efficiency of
capital show in figure 10.5.
We see that for the same value of marginal efficiency
of capital, because of presence of optimum, the more
investment is available on curve MEC . For example
2
the decrement in income tax and corporation tax are Figure 10.5 : Shifting of MFC curve
inspired to entrepreneurs for shifting upward their
investment projects. So entrepreneurs will favourably correct the techniques. Apposite it, if depression
involved, anticipated return falls low level on capital and MEC curve will shift downward. Except it,
for example, the fall in income because of labour deduction and the fall in the demand of goods and
services will push the MEC curve downward. Direct taxes can also reduce the investment demand.
S we see that the marginal efficiency of capital, on which investment demand depend, are effected
o
by the government policy, technical element, business situation etc, that are unpredictable.

10.4 Investment Demand Curve

It is above clear that firms invested
until the marginal efficiency of capital
is not being equals to the market rate
of interest. So for the list of certain
marginal efficiency of capital, the level
of investment demand is decided by the
rate of interest. The value of marginal
efficiency of capital is being established
by the market rate of interest, we get Marginal Efficiency of Cost (M E C) and Rate of Interest (r)
the list of investment demand and
investment demand curve. In figure
10.6, investment is presents investment
demand to address to different levels
of interest.
According to the imaginary marginal
efficiency of capital list is show in that
chapter, marginal efficiency of capital is
15% on the 25 crores investment. It can Investment (Crore Rupees)
be conclude that 25 crores investment
available on 15% rate of interest, because Figure 10.6: Investment Demand Curve
marginal efficiency of capital (MEC) will equals to rate of interest (r) on only that investment level.
So, when the rate of interest fall 12%, investment increased 27 corers. On 12% rate of interest I = r .
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